Segment Reporting

We have two strategic business units that we manage separately—Mortgage Insurance and Services. Adjusted pretax operating income (loss) for each segment represents segment results on a standalone basis; therefore, inter-segment eliminations and reclassifications required for consolidated GAAP presentation have not been reflected.

We allocate to our Mortgage Insurance segment: (i) corporate expenses based on its forecasted annual percentage of total revenue, which approximates the estimated percentage of time spent on the Mortgage Insurance segment; (ii) all interest expense (except for interest expense related to an intercompany note with terms consistent with the original issued amount of $300 million from the Senior Notes due 2019 that were used to fund our purchase of Clayton, all of which is allocated to our Services segment); and (iii) all corporate cash and investments.

We allocate to our Services segment: (i) corporate expenses based on its forecasted annual percentage of total revenue, which approximates the estimated percentage of time spent on the Services segment and (ii) the allocated interest expense related to the intercompany note as described above. No material corporate cash or investments are allocated to the Services segment. Inter-segment activities are recorded at market rates for segment reporting and eliminated in consolidation.

Contract underwriting activities are reported within our Services segment. We include underwriting-related expenses for mortgage insurance, based on a pro-rata volume of mortgage applications excluding third-party contract underwriting services, in our Mortgage Insurance segment’s other operating expenses before corporate allocations. We include underwriting-related expenses for third-party contract underwriting services, based on a pro-rata volume of mortgage applications, in our Services segment’s cost of services and other operating expenses before corporate allocations, as applicable.

Adjusted Pretax Operating Income (Loss)

Our senior management, including our Chief Executive Officer (Radian’s chief operating decision maker), uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of each of Radian’s business segments and to allocate resources to the segments. Adjusted pretax operating income (loss) is defined as pretax income (loss) from continuing operations excluding the effects of net gains (losses) on investments and other financial instruments, loss on induced conversion and debt extinguishment, acquisition-related expenses, amortization or impairment of goodwill and other intangible assets, and net impairment losses recognized in earnings and losses from the sale of lines of business.

Although adjusted pretax operating income excludes certain items that have occurred in the past and are expected to occur in the future, the excluded items represent those that are: (i) not viewed as part of the operating performance of our primary activities or (ii) not expected to result in an economic impact equal to the amount reflected in pretax income. These adjustments, along with the reasons for their treatment, are described below.

(1)

Net gains (losses) on investments and other financial instruments. The recognition of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on the timing of individual securities sales due to such factors as market opportunities, our tax and capital profile and overall market cycles. Unrealized investment gains and losses arise primarily from changes in the market value of our investments that are classified as trading or equity securities. These valuation adjustments may not necessarily result in realized economic gains or losses.

Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these realized and unrealized gains or losses. We do not view them to be indicative of our fundamental operating activities. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss).

(2)

Loss on induced conversion and debt extinguishment. Gains or losses on early extinguishment of debt and losses incurred to purchase our convertible debt prior to maturity are discretionary activities that are undertaken in order to take advantage of market opportunities to strengthen our financial and capital positions; therefore, we do not view these activities as part of our operating performance. Such transactions do not reflect expected future operations and do not provide meaningful insight regarding our current or past operating trends. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss).

(3)

Acquisition-related expenses. Acquisition-related expenses represent the costs incurred to effect an acquisition of a business (i.e., a business combination). Because we pursue acquisitions on a strategic and selective basis and not in the ordinary course of our business, we do not view acquisition-related expenses as a consequence of a primary business activity. Therefore, we do not consider these expenses to be part of our operating performance and they are excluded from our calculation of adjusted pretax operating income (loss).

(4)

Amortization or impairment of goodwill and other intangible assets. Amortization of intangible assets represents the periodic expense required to amortize the cost of intangible assets over their estimated useful lives. Intangible assets with an indefinite useful life are also periodically reviewed for potential impairment, and impairment adjustments are made whenever appropriate. These charges are not viewed as part of the operating performance of our primary activities and therefore are excluded from our calculation of adjusted pretax operating income (loss).

(5)

Net impairment losses recognized in earnings and losses from the sale of lines of business. The recognition of net impairment losses on investments and the impairment of other long-lived assets does not result in a cash payment and can vary significantly in both amount and frequency, depending on market credit cycles and other factors. Losses from the sale of lines of business are highly discretionary as a result of strategic restructuring decisions, and generally do not occur in the normal course of our business. We do not view these losses to be indicative of our fundamental operating activities. Therefore, whenever these losses occur, we exclude them from our calculation of adjusted pretax operating income (loss).

Summarized operating results for our segments for the periods indicated, are as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2018			2017			2018		2017
Mortgage Insurance
Net premiums written—insurance (1)	$	251,958		$	241,307		$	489,938	$	465,972
(Increase) decrease in unearned premiums	(2,990		)	(12,211		)	1,580		(15,076		)
Net premiums earned—insurance	248,968			229,096			491,518		450,896
Net investment income	37,447			30,071			71,403		61,103
Other income	621			612			1,428		1,358
Total (2)	287,036			259,779			564,349		513,357

Provision for losses	19,362			17,714			56,753		64,946
Policy acquisition costs	5,996			6,123			13,113		12,852
Other operating expenses before corporate allocations	33,262			37,939			65,150		77,228
Total (3)	58,620			61,776			135,016		155,026
Adjusted pretax operating income before corporate allocations	228,416			198,003			429,333		358,331
Allocation of corporate operating expenses	20,136			15,894			38,713		30,080
Allocation of interest expense	10,840			11,748			21,469		23,257
Adjusted pretax operating income	$	197,440		$	170,361		$	369,151	$	304,994

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(1)	Net of ceded premiums written under the QSR Program and the Single Premium QSR Program. See Note 7 for additional information.


(2)	Excludes net losses on investments and other financial instruments of $7.4 million and $26.3 million for the three and six months ended June 30, 2018, and net gains on investments and other financial instruments of $5.3 million and $2.5 million for the three and six months ended June 30, 2017, not included in adjusted pretax operating income.

(3)Includes inter-segment expenses as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2018		2017		2018		2017
Inter-segment expenses	$	885	$	2,173	$	1,887	$	4,235



	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2018			2017			2018			2017
Services
Net premiums earned—insurance (1)	$	2,376		$	—		$	2,376		$	—
Services revenue (2)	37,713			39,975			71,879			80,064
Net investment income (1)	26			—			26			—
Other income (1)	395			—			395			—
Total (2)	40,510			39,975			74,676			80,064

Provision for losses (1)	53			—			53			—
Cost of services	24,357			25,962			47,627			54,652
Other operating expenses before corporate allocations	14,015			12,803			24,759			25,407
Restructuring and other exit costs (3)	1,055			—			1,580			—
Total	39,480			38,765			74,019			80,059
Adjusted pretax operating income (loss) before corporate allocations	1,030			1,210			657			5
Allocation of corporate operating expenses	3,010			3,404			5,794			7,122
Allocation of interest expense	4,451			4,431			8,902			8,860
Adjusted pretax operating income (loss)	$	(6,431	)	$	(6,625	)	$	(14,039	)	$	(15,977	)

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(1)	Results from inclusion of the operations of EnTitle Direct, a national title insurance and settlement services company, acquired in March 2018.

(2)Includes inter-segment revenues as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2018		2017		2018		2017
Inter-segment revenues	$	885	$	2,173	$	1,887	$	4,235


(3)	Does not include impairment of long-lived assets and loss from the sale of a business line, which is not a component of adjusted pretax operating income.

Selected balance sheet information for our segments, as of the periods indicated, is as follows:



	At June 30, 2018
(In thousands)	Mortgage Insurance		Services		Total
Total assets	$	5,949,845	$	189,643	$	6,139,488

	At December 31, 2017
(In thousands)	Mortgage Insurance		Services		Total
Total assets	$	5,733,918	$	166,963	$	5,900,881

The reconciliation of adjusted pretax operating income to consolidated pretax income (loss) is as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2018			2017			2018			2017
Adjusted pretax operating income (loss):
Mortgage Insurance (1)	$	197,440		$	170,361		$	369,151		$	304,994
Services (1)	(6,431		)	(6,625		)	(14,039		)	(15,977		)
Total adjusted pretax operating income	191,009			163,736			355,112			289,017

Net gains (losses) on investments and other financial instruments	(7,404		)	5,331			(26,291		)	2,480
Loss on induced conversion and debt extinguishment	—			(1,247		)	—			(5,703		)
Acquisition-related expenses (2)	(416		)	(64		)	(416		)	(72		)
Impairment of goodwill	—			(184,374		)	—			(184,374		)
Amortization and impairment of other intangible assets	(2,748		)	(18,856		)	(5,496		)	(22,152		)
Impairment of other long-lived assets and loss from the sale of a business line (3)	130			—			104			—
Consolidated pretax income (loss)	$	180,571		$	(35,474	)	$	323,013		$	79,196

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(1)	Includes inter-segment expenses and revenues as listed in the notes to the preceding tables.


(2)	Acquisition-related expenses represent expenses incurred to effect the acquisition of a business, net of adjustments to accruals previously recorded for acquisition expenses.


(3)	Included within restructuring and other exit costs. See Note 1.

On a consolidated basis, “adjusted pretax operating income” is a measure not determined in accordance with GAAP. Total adjusted pretax operating income is not a measure of total profitability, and therefore should not be considered in isolation or viewed as a substitute for GAAP pretax income. Our definition of adjusted pretax operating income may not be comparable to similarly-named measures reported by other companies.